In Quebec, municipalities can levy property taxes on data center equipment, just as they can on other types of real estate and equipment. How these taxes are levied depends on a number of factors, including local tax policies, property values and assessments by municipal authorities. It therefore seems appropriate to inform our customers about the possible applicability to their sector of activity, as case law in recent years seems to adopt a broad interpretation of the term “real estate”.
This broader interpretation is particularly important given the province’s attractiveness as a location for data centers. Indeed, Quebec offers many advantages, including an affordable and abundant source of energy through Hydro-Québec’s power grid, and a cooler climate. What’s more, Montreal’s worldwide reputation for artificial intelligence further enhances the attractiveness of Quebec markets.
What is an immovable under the terms of the Municipal Taxation Act?
An immovable, under the Municipal Taxation Act (the “LFM“), is understood both in its common sense, i.e. the land, the permanent buildings on it, and everything that forms an integral part of itin a sense specific to the LFM, i.e. fixed assets by attachment of movable property to an immovable. Cette interprétation spécifique soulevée par la loi suscite davantage d’interrogations, ce pour quoi elle sera l’objet principal du présent article.
What meaning should be given to the notion of immobilization by attachment?
In recent years, the Court of Appeal has closely examined the specific issue of classifying data center equipment as permanently attached to a building. The Court concluded that data center equipment can be qualified as “permanently attached” even in the absence of physical attachment, provided there is a conceptual link with the building.
Indeed, in the Ville de Montréal v. Société en commandite Locoshop Angus In a case dealing with the question of whether the equipment used to host computer servers is considered to be movable property “permanently attached” to the building in which it is installed, and consequently whether it should be included in the property assessment of that building, the Court reached four conclusions :
- The absence of a physical attachment is not decisive in establishing the immobilization of equipment. What counts is their effective immobilization.
- The general purpose of buildings does not determine the classification of the movables attached to them. Immobilization by attachment of movable property is not limited to buildings with a specific vocation.
- The presence of several tenants in a building does not prevent the attachment of movable property.
- The intellectual link or relationship of destination concerns the building or its components. For example, a building-integrated electrical and air-conditioning supply and distribution network to meet the specific needs of a data center. Even if certain equipment exceeds the building’s usual requirements, this does not alter the intellectual link between this equipment and the part of the building leased by the tenant.
The Court reiterates these principles in Ville de Québec v. Vidéotron ltée . Dans cet arrêt, la Ville de Québec conteste la décision d’exclure les équipements de téléphonie sans fil de Vidéotron de l’évaluation foncière. La Cour d’appel statue en faveur de la Ville de Québec, permettant ainsi l’ajout de ces équipements au rôle foncier conformément à la LFM sous le même critère d’inclusion, soit que les équipements de téléphonie sans fil répondaient aux critères définis par la loi pour être considérés comme attachés à demeure à l’immeuble et donc imposables. Cela inclut notamment l’immobilisation des équipements et leur lien avec l’immeuble.
What are the possible impacts of this broad interpretation?
Case law, with its broad interpretation of the term “real estate”, leads us to urge our clients to take a cautious approach to leases involving not only data centers, but also any other area related to the telecoms sector, and any company wishing to invest in equipment. Indeed, the value of technological equipment in a building can be high, so it’s important to take this possibility of taxation into account when negotiating and drafting real estate leases, both as tenant and landlord, in order to establish the roles and responsibilities of each in this respect.
The latest news is that data centers have mobilized to challenge this interpretation. In their view, the industry should benefit from the same property tax exemptions that apply to the manufacturing sector. This mobilization also extends to the Conseil du patronat and the Fédération des chambres du commerce du Québec. Representations are being made to the authorities in this regard, and we will update this article at the appropriate time. However, the Supreme Court rejected the application for leave to appeal these two recent Court of Appeal rulings, leaving the companies in question with no choice but to appeal.
By Selma Adam and Audrey Robitaille